Question

Suppose a country has not been trading with the rest of the world. If the country...

Suppose a country has not been trading with the rest of the world.

If the country decides to allow free trade and the world price for bananas is greater than their domestic price for bananas,

(a) will the country export or import bananas?

(b) Explain what happens in this situation to consumer surplus, producer surplus, and total surplus as a result of free trade, that is, compare these areas of surplus before trade and after trade.

Show using an appropriate graph.

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